Should I Do A Roth Conversion Tutorial

[RetireBy90]

From the link in post 1, if nothing is changed these are the rates we will revert to for 2026 tax year. I would move from 24% bracket to 28%, although most of taxable income was Roth conversions. My plan is three more years of conversions and remaining RMDs will fund QCDs.

2017/2026 Taxes

Rate/Upper Limit

10%/ $35,552

15%/ $100,483

25%/ $188,041

28%/ $279,058

33%/ $487,008

 

[SecondCor521]

But at least for me and I suspect others, the decision is to convert $x to in my case the top of the 12% tax bracket. So if that $x ends up being 100 shares at $100/eachor 200 shares at $50/each then it doesn't much matter to me.

That and there is no guarantee that it will recover to $100 especially for individual stocks and even for stock funds, returns over the next decade are expected to be modest.

I agree on both points.

There is, though, a sort of longer-term feedback effect where converting more shares while the dollar is down is more efficient or impactful at chipping away at the multi-year project of getting as much converted as is possible.

As a simplistic example, if my plan is to convert $50K a year for 10 years, and the market takes that magical divide by 2 multiply by 2 dip and recovery, my $50K in year 1 during the dip means I only have $400K to convert over the remaining 9 years of my plan.

My plan isn't that static, but in general there would be a knock-on effect where I would gain some benefit - I'd either be able to convert more than I originally thought, or pay lower taxes at the end of my plan, or something.

In practice, it really doesn't matter, though. There aren't enough of those magical dip and recoveries, and I've got a lot to convert, and my marginal rate is going to be 2x% no matter what I do. I'm just doing what I can.

(My plan is to convert each year what makes sense up to my projected early-80s marginal rate each year, and iterate each year based on updated tax brackets, IRMAA brackets and premiums, IRA balances, etc.)

 

[RetireBy90]

I agree on both points.

There is, though, a sort of longer-term feedback effect where converting more shares while the dollar is down is more efficient or impactful at chipping away at the multi-year project of getting as much converted as is possible.

As a simplistic example, if my plan is to convert $50K a year for 10 years, and the market takes that magical divide by 2 multiply by 2 dip and recovery, my $50K in year 1 during the dip means I only have $400K to convert over the remaining 9 years of my plan.

My plan isn't that static, but in general there would be a knock-on effect where I would gain some benefit - I'd either be able to convert more than I originally thought, or pay lower taxes at the end of my plan, or something.

In practice, it really doesn't matter, though. There aren't enough of those magical dip and recoveries, and I've got a lot to convert, and my marginal rate is going to be 2x% no matter what I do. I'm just doing what I can.

(My plan is to convert each year what makes sense up to my projected early-80s marginal rate each year, and iterate each year based on updated tax brackets, IRMAA brackets and premiums, IRA balances, etc.)

With many, optimal conversion years are few, normally after FIRE while living on savings outside IRA before RMDs kick in. So, in practice I agree, one bear market, perhaps spanning a couple tax years when it can make a significant difference.

 

[pb4uski]

With many, optimal conversion years are few, normally after FIRE while living on savings outside IRA before RMDs kick in. So, in practice I agree, one bear market, perhaps spanning a couple tax years when it can make a significant difference.

As long as the bear market is followed by a bull market.

 

[RetireBy90]

As long as the bear market is followed by a bull market.

Every bear has been followed by a bull so far, and as I’ve heard although the end of the world can be profitable to bet on, it can be hard to collect. Something like that.

 

[pb4uski]

Every bear has been followed by a bull so far...

Perhaps in the US, but not worldwide. Never say never.

The Chinese stock market has been in a bear market since 2015. The Shanghai Composite index, which is the benchmark for the Chinese stock market, has lost more than half of its value since its peak in 2015.

The Russian stock market has been in a bear market since 2014. The MICEX index, which is the benchmark for the Russian stock market, has lost more than two-thirds of its value since its peak in 2014.

The Turkish stock market has been in a bear market since 2018. The BIST 100 index, which is the benchmark for the Turkish stock market, has lost more than half of its value since its peak in 2018.

 

[RetireBy90]

Perhaps in the US, but not worldwide. Never say never.

The Chinese stock market has been in a bear market since 2015. The Shanghai Composite index, which is the benchmark for the Chinese stock market, has lost more than half of its value since its peak in 2015.

The Russian stock market has been in a bear market since 2014. The MICEX index, which is the benchmark for the Russian stock market, has lost more than two-thirds of its value since its peak in 2014.

The Turkish stock market has been in a bear market since 2018. The BIST 100 index, which is the benchmark for the Turkish stock market, has lost more than half of its value since its peak in 2018.

You got me there. That would be worst of the worst, take the tax bite and then what is left keeps going down. Not only loose your investment but pay the tax also.

 

[Koolau]

I vote for a tutorial.

I'm wondering if the Geezer crowd (of which I'm one) would benefit from potential Roth conversions. I did many back in the day. Is there ever any advantage at advanced age (beyond RMDs age for instance?)

What about the advantages(?) of inheritance - especially for surviving spouse?

 

[pb4uski]

My plan would include some very modest Roth conversions to the top of the 12% tax bracket even after RMDs begin but only because later in the plan we pop up into the 22% tax bracket. YMMV.

I don't really know how to address the surviving spouse thing... one or the other of us is going to get hosed, but at the same time I don't want to pay big taxes now and have us both live long.

 

[Koolau]

My plan would include some very modest Roth conversions to the top of the 12% tax bracket even after RMDs begin but only because later in the plan we pop up into the 22% tax bracket. YMMV.

I don't really know how to address the surviving spouse thing... one or the other of us is going to get hosed, but at the same time I don't want to pay big taxes now and have us both live long.

Yeah that whole "surviving spouse" thing is a subject unto itself. I'm struggling with it now. It would help if DW were more interested, but I'm whining now.

 

[SecondCor521]

I vote for a tutorial.

I'm wondering if the Geezer crowd (of which I'm one) would benefit from potential Roth conversions. I did many back in the day. Is there ever any advantage at advanced age (beyond RMDs age for instance?)

What about the advantages(?) of inheritance - especially for surviving spouse?

I agree with @pb4uski, there can be an advantage to Roth conversions even at RMD age if not doing them would result in higher taxes later (and you expect to live that long, etc.)

My spreadsheet seems to show that the IRMAA brackets live between the top of 22% and top of 24%. So a plausible scenario would be Roth convert up to an IRMAA bracket now to maybe prevent being in a higher IRMAA bracket or into the 24% bracket later.

Those scenarios aren't as compelling as avoiding a 3x% bracket, or avoiding the 22% bracket if you can maybe stay in the 12% bracket most of the time, but they still exist and still are probably worth the hour of work a year to look at and execute.

I need to doublecheck my numbers but it does seem like that second ($372.30) IRMAA tier is a fairly severe hit on a percentage basis (equivalent to an over 7% marginal rate, even if one fills the IRMAA bracket).

 

[Slim11]

I am still up in the air. While, I will be retired at the end of the month, I will just be turning 50. I figure If I convert some each year to a roth , over 5 or 10 years it may be better. It may not be. Who knows. I figure, I may not need this money, so if I convert some of it, then I can leave the Roth to my daughter. If I do need it, it probably will not be until 65 or 70.

 

[JBTX]

From Roth conversion (in down markets) - Bogleheads

The bottom paragraph sums it up. All else equal, it is better to do it when markets are low vs high, but it may not be as advantageous as it seems on the surface.

First we have to assume where the taxes for the conversion will be paid out of. The most logical assumption is that they will be in a taxable account, invested similarly to the Traditional Ira that you are converting. (If you assume it is just cash or cash equivalents, by doing a Roth conversion you are essentially increasing your after tax stock allocation, which may or may not be good, but it isn’t apples to apples)

Scenario 1: convert when market is high. Pay $10k in taxes in a taxable account (assumed)

Scenario 2: market crashes 50%, then convert. Pay $5k in taxes from the taxable account.

The amount from the traditional going to Roth it doesn’t matter whether you convert high or low. It is all about the tax rate.

The difference is in the taxes paid. In the market crash scenario, you avoid the taxes on the taxes- the $5 grows to $10k tax free vs at market high in the taxable account there would be capital gains on the $10k. So maybe 15% of $5000 or $750 saved on a conversion of $40k to $50k.

The savings will be much more if the market crash actually causes the conversion to be at a lower marginal rate.

 

[rayvt]

I completely understand the "tax rate now vs the tax rate later" calculation. Where it get's a little hazy is doing a roth conversion when the market crashes. Like is it still only difference in tax rates, or If the market falls 50% could you be ahead doing a roth conversion even if your expected tax rate isn't lower now?

It does not matter about if the market is crashed or not. The gain after the crash will be the same whether in the Roth or the TIRA.

It is only the tax rates of now (convert) vs. later (don't convert).

 

[Winemaker]

It does not matter about if the market is crashed or not. The gain after the crash will be the same whether in the Roth or the TIRA.

It is only the tax rates of now (convert) vs. later (don't convert).

While this is true to a certain extent, timing can be of most importance. Those trying to minimize their tIRA accounts whish to convert to the max up until other taxable cliffs. I would rather convert 1,333.3 shares at $75 than 1000 shares at $100 (total is =$100,000 either way). It gets more shares out of the tIRA account.

There are strategies for those who convert early in year, at a correction, or a system of both, then topping off in December when a better grip on annual income is known. My rental income can be controlled to some extent during the year through legitimate expenses, so I convert early with a esitmate, then top of in December to maximize the yearly amount.

 

[Phroig]

Also, the gains in the Roth won’t be taxed. The gains in the TIRA will be taxed at your marginal tax rate when you withdraw them.

 

[Romer]

It does not matter about if the market is crashed or not. The gain after the crash will be the same whether in the Roth or the TIRA.

It is only the tax rates of now (convert) vs. later (don't convert).

This isnt quite true.

In January I converted 3000 shares of a stock worth $290K and paid tax on the $290K

Those 3000 shares are now worth $400K and if I withdrew them from my tIRA now I would pay tax on an additional $110K for the same amount of shares.
Next year, I won't be so ambitious with my conversions and stay within the 22% vs 24% bracket. I saw an opportunity so moved on it. It also could have been a risk as you never know what way the market will go.

 

[audreyh1]

My plan would include some very modest Roth conversions to the top of the 12% tax bracket even after RMDs begin but only because later in the plan we pop up into the 22% tax bracket. YMMV.

I don't really know how to address the surviving spouse thing... one or the other of us is going to get hosed, but at the same time I don't want to pay big taxes now and have us both live long.

How to address the surviving spouse tax burden:

Take a good look at what the total amount either surviving spouse will inherit and their lifetime needs (heavily padded of course). Then consider how much of any inherited IRA they really need. Look at having your heirs inherit the rest of it thus reducing the annual RMDs on the surviving spouse. Beneficiaries can be updated online as needed to fine tune things.

 

[SevenUp]

It does not matter about if the market is crashed or not. The gain after the crash will be the same whether in the Roth or the TIRA.

It is only the tax rates of now (convert) vs. later (don't convert).

This isnt quite true.

In January I converted 3000 shares of a stock worth $290K and paid tax on the $290K

Those 3000 shares are now worth $400K and if I withdrew them from my tIRA now I would pay tax on an additional $110K for the same amount of shares.

Actually it is true. Going from $290 to $400 is about a 38% increase, and assuming a tax rate of 24%:
Convert in January = $290K * (1 - 24%) * 1.38 = $304K
Convert now........ = $290K * 1.38 * (1 - 24%) = $304K
That's the Simplest situation, covered by the Commutative property of multiplication.

Ah, but what if the tax was paid from cash flow (e.g., W-2 or pension income)? That complicates things and you have to consider the "Traditional plus taxable" vs. Roth math. If there would be any tax drag in the taxable account, then "tie goes to the Roth" (aka the conversion in January was favorable).

AFAIK, the BH wiki remains correct where it says, "Being able to convert a larger fraction of your traditional account in a down market when the marginal tax rate for the conversion is favorable is a good thing, but a down market does not make incurring a higher marginal tax rate favorable. — https://www.bogleheads.org/wiki/Roth_conversion."

For example, let's say the conversion had been done as a single person in Dec. 2022: the marginal rate on some of the $290K would have been over 30%. Converting then would have been unfavorable if you got married in 2023 and could have converted at 24%.

 

[Romer]

I plan on converting all my tIRA to Roth over time. With that in mind, your math doesn't make sense to me since I avoided paying tax on $110K in any situation you look at. I disagree, but not going to get into a fight with you. Everyone's situation is different

 

[Out-to-Lunch]

This isnt quite true.

In January I converted 3000 shares of a stock worth $290K and paid tax on the $290K

Those 3000 shares are now worth $400K and if I withdrew them from my tIRA now I would pay tax on an additional $110K for the same amount of shares.
Next year, I won't be so ambitious with my conversions and stay within the 22% vs 24% bracket. I saw an opportunity so moved on it. It also could have been a risk as you never know what way the market will go.

But what money did you use to pay the tax? If you had left that money invested at the same AA that your IRA money was invested, it, too, would have increased by 38% and would have been able to pay for this aditional tax (absent a change in tax bracket). If you did NOT have this money invested at the same AA as your IRA money, then you changed the risk profile of your portfolio.

 

[SevenUp]

I plan on converting all my tIRA to Roth over time. With that in mind, your math doesn't make sense to me since I avoided paying tax on $110K in any situation you look at. I disagree, but not going to get into a fight with you. Everyone's situation is different

Yes, everyone's situation is different. It might help if you look at how much is left after paying tax instead of how much tax is paid.

Consider paying 30% tax now vs. 20% tax later, with a $100K investment that doubles between now and later.

Convert now: $100K * (1 - 30%) * 2 = $140K, with $30K tax paid on $100K
Convert later: $100K * 2 * (1 - 20%) = $160K, with $40K tax paid on $200K

Which would you suggest?

 

[Romer]

where do you come up with 30% now vs 20% later? With pension and SS, I will be in the 25% bracket in 2026 when I turn 65, or 67 if I wait till then for SS. Anything converted or withdrawn then will be at 25% with tax bracket change. I am paying less tax now due to lower rates

This year I had cash having retired at the end of last year so used the cash to pay taxes and also to convert to the 24% bracket. Got my prorated Bonus last year and then used (along with a CD that was due) to pay taxes in January when I converted

You are both saying that it makes no difference converting now vs later. I don't see that, but it is really irrelevant to my long term plan since I will convert 100% over the next 8 years and starting next year I need to be aware of IRRMA limits. This year was my opportunity to make a big conversion

so even if you are saying it makes no difference as it would be the same, that doesn't change my strategy. Still do not see how it would be the same and I am pretty good at math

I see there is a diverse set of opinions on convert vs no value in converting. As I stated earlier in this thread I will convert 100% of the tIRA to Roth. That way when I pass, my wife will have zero state tax and miniscule (if any) fed tax. She won't have to worry about RMDs or tIRA withdrawals and how to pay taxes. Will that approach cost me more money . . . Debatable (I say no others say yes), but the piece of mind setting my wife up for a simplistic approach is well worth it to me. And if she passes first, then I will have it easier. Anything it would cost me doesn't impact how we live or that my kids will get a lot and tax free.

 

[SevenUp]

where do you come up with 30% now vs 20% later?

It's an example with round numbers. You could add state taxes and have tax rates with fractional percentages but it wouldn't change the point.

I am paying less tax now due to lower rates

And that is the point: it is the rates that matter, not the absolute amount of taxes paid.

You are both saying that it makes no difference converting now vs later.

If the marginal tax rate on the conversion is identical and taxes are paid from the conversion amount.

so even if you are saying it makes no difference as it would be the same, that doesn't change my strategy. Still do not see how it would be the same and I am pretty good at math

Hearken back to the commutative property of multiplication (Grade 3?). It's also covered in the BH wiki Calculations section.

I see there is a diverse set of opinions on convert vs no value in converting.

There definitely can be value in converting, whether objective (the math) or subjective (e.g., less stress on the survivors, as in your plan). No argument there.

It's just that there is no magic that overrides the math when "the market is down". The marginal tax rates still govern the objective results.

 

[Romer]

I do appreciate your response and don't want to be one of those "get off my post " kind of guys.

I understand what you are saying if tax rates are the same as they are later and I agree. That isn't the case unless congress surprises us and extends them. At the simplest case, I see conversions at 22 and 24%(this year) better than 25% -28% withdrawals later. I also see having minimal taxes when one of us switches to single rates as a big benefit relative to marginal rates although no way to quantify without knowing when that happens. Since my pension goes when I do, her SS taxable would also change to 50% vs 85% which wouldn't happen if she is pulling $$$ out of a tIRA to fully cover expenses.

Finally, the market being down gave me the opportunity to transfer more qty of stock within the same tax bracket this year is the benefit I see. That makes it less to convert later and reduces the time to complete full conversion